Risk aversion continued to influence as China experienced another round of deep losses, which took the SSEC into bear market territory. However, the impact on the FX market was more muted and the G10 FX experienced an inside day. The EUR marked time close to 1.3100, Cable found a foothold over 1.5400, while AUD trade close to 0.9200. USD-JPY movement was choppy again, largely due to equity market moves and it experienced limited upside over 98.00. So far, China has not responded to liquidity problems, though money markets rates are off the highs seen last week. There is conjecture that the PBoC may be holding out until quarter-end, when liquidity is expected to improve.

[EUR, USD]EUR-USD traded a tight range ahead of 1.3100. After starting the session around 1.3120 it edged up to 1.3135. However, equity market losses in China weighed on other regional indices and this limited the EUR upside. There was more price chop via the EUR crosses. EUR-JPY was heavily influenced by the Nikkei, which moved from positive to negative territory and left the cross under 128.00. EUR-AUD was underpinned over 1.4200 versus the 1.4150 area early on as China woes weighed on AUD. The balance of EUR-USD risk should remain on the downside given the current appetite for dollars, though EUR ran into very good support through the 200-dma at 1.3070 on Monday.

[USD, JPY]USD-JPY experienced more choppy action as the Nikkei moved from positive to negative territory, though eventually closed out losses in excess of 1.5%. USD-JPY firmed up from the 97.50 region on Japanese importer demand and extended through 98.00 amid a offshore fund buy order. Movement over 98.00 was limited though as specs were focused on China moves, which dragged Japanese markets into negative territory. USD-JPY retraced all of its gains and extended to 97.25 by late Asia. A reduction in speculative positioning should see periods of yen gains, but appetite to hold dollars may limit USD-JPY losses. Good support is tipped into the 97.00 region, while more buyers are noted from 96.75-80.

[GBP, USD]Cable has benefited from EUR-GBP heaviness. The cross corrected from 0.8540 to levels under 0.8500 on Monday amid general EUR selling, which was fixed related on behalf of fund names, along with leverage account interest. However, further EUR-GBP losses have been absorbed by very strong bids from 0.8480 to 0.8470, linked to option positions related to Vodafone's EUR 7.7 bln deal for Kabel Deutschland. The EUR-GBP retracement has enabled Cable to regain a foothold over 1.5400 and it extended to highs over 1.5450, leaving short term bias slighly in favor of the topside.

[USD, CHF]EUR-CHF backed up over 1.2250 after it found very strong support into 1.2220 on Monday. The CHF had benefited from a flight to safety, which also capped the USD-CHF upside. However, EUR-CHF should meet long position building on dips ahead of the 200-dma around 1.2215, while the dollar pairing should hold up amid underlying dollar strength and positive technical indicators.

[USD, CAD]USD-CAD has backed away from 1.0520 in late Asia and headed through the 1.0500 region as sentiment improves slightly into the European open. China experienced more very heavy losses overnight. However, early European accounts are responding to reports that the PBoC and the big four banks will hold a press conference after attending a forum to discuss the recent market turmoil. USD-CAD will remain highly sensitive to equity market moves. Bids lie into 1.0470-80 and 1.0440. Longs eye October 5, 2011 highs of 1.0572, which will be the next target upside target, while the October 4, 2011 peak of 1.0657 is in line thereafter.